What is Senior Debt?

Senior debt refers to a class of debt that has priority over other types of debt in the event of a borrower’s default or bankruptcy. It is considered less risky than other forms of debt, such as subordinated or junior debt, because senior debt holders are the first in line to be repaid from the available assets of the borrower. In other words, if a borrower becomes insolvent and its assets are liquidated, senior debt holders will be paid before any other creditors.

Senior debt typically has lower interest rates compared to other types of debt, reflecting its lower risk profile. This type of debt is often secured by collateral, which means it is backed by specific assets of the borrower, such as property or equipment. If the borrower defaults on the loan, the lender has the right to seize the collateral to recover the outstanding debt.

Examples of senior debt instruments include:

  1. Secured bank loans: Bank loans that are secured by collateral, such as real estate or equipment, are typically considered senior debt.
  2. Corporate bonds: Some corporate bonds are classified as senior debt, meaning they have a higher priority for repayment than other unsecured or subordinated debt issued by the same company.
  3. Mortgage loans: Mortgage loans are typically senior debt, as they are secured by the property being purchased, which serves as collateral for the loan.

In a capital structure, senior debt is followed by other layers of debt and equity, such as mezzanine financing, subordinated debt, preferred stock, and common stock. Each layer represents a different level of risk and return, with senior debt being the least risky and common stock being the riskiest.